Payroll Garnishments: Small Business Guide

This article is part of a larger series on How to Do Payroll.

1. 1 Types of Payroll Garnishments
2. 2 Basics of the Process
3. 3 Legal Regulations
4. 4 Bottom Line

Payroll garnishments are legal deductions from an employee’s wages, mandated by court orders or government agencies, to satisfy debts such as child support, tax levies, or student loans. Ensuring compliance with payroll garnishment rules is crucial, as failure to do so can lead to serious consequences, including fines and penalties.

Payroll garnishments can be daunting. This concise guide, designed for small businesses, navigates you through the types of garnishments, their complexities, and the corresponding regulations, to ensure compliance and efficiency when processing them.

Types of Payroll Garnishments

Each type of garnishment comes with its own set of compliance rules and considerations. It’s essential for small business owners to understand the differences between these garnishments to ensure proper handling and compliance.

The most common types of garnishments include:

1. Child support garnishments: These garnishments are ordered by a court or state child support enforcement agency to provide financial support for an employee’s children. Typically, these garnishments take priority over other types of garnishments and have specific calculation rules.

For example, under federal law, the maximum withholding amount for child support can range from 50%–65% of the employee’s disposable earnings. This depends on factors like whether the employee supports other dependents and the age of the outstanding debt.

1. Federal tax levies: Issued by the Internal Revenue Service (IRS), federal tax levies require employers to withhold a portion of an employee’s wages to pay outstanding tax debts. The exact amount withheld is determined by the IRS and depends on the employee’s filing status, number of dependents, and pay frequency.

Employers must carefully follow the instructions provided by the IRS when processing these garnishments, as failure to comply can cause significant penalties.

1. State tax levies: Similar to federal tax levies, state tax levies are issued by state tax agencies to collect unpaid state taxes. The specific rules and procedures for state tax levies vary by state, so it’s important to consult your state’s tax agency for guidance on handling these garnishments.
2. Student loan garnishments: If an employee has defaulted on their student loans, the Department of Education or a private loan holder can request garnishment of their wages. Under federal law, the maximum withholding amount for student loan garnishments is usually limited to 15% of the employee’s disposable earnings. However, some states may impose additional restrictions or requirements, so be sure to consult your state’s regulations.
3. Creditor garnishments: Ordered by a court in cases where an employee owes money to a private creditor, these garnishments are subject to both federal and state limits on the maximum amount that can be withheld.

Under the Consumer Credit Protection Act (CCPA), the maximum garnishment amount for most debts is either 25% of an employee’s disposable earnings or the amount by which their disposable earnings exceed 30 times the federal minimum wage, whichever is lower. State laws may impose stricter limits or additional procedural requirements.

Compliance note: It’s crucial to follow the proper order of priority as established by federal and state regulations to ensure your payroll process is compliant. Generally, child support garnishments take precedence over other types of garnishments. Federal tax levies typically have priority over state tax levies, student loan garnishments, and creditor garnishments. In cases where multiple garnishments exceed the allowable limits under the CCPA, you’ll need to allocate the withheld amounts proportionally based on the legal priority of each garnishment.

While garnishments are involuntary and required by law to satisfy specific debts, other deductions, like taxes and retirement contributions, are standard payroll practices and are typically agreed upon between the employer and employee. Voluntary deductions, such as health insurance premiums or contributions to a 401(k) plan, are also distinct from garnishments, as they are based on the employee’s choice to participate in these benefits.

Basics of the Payroll Garnishment Process

You should integrate processing of any payroll garnishments into your payroll process. For more information on establishing the basics of handling payroll, check out our how to do payroll guide.

To help you navigate the payroll garnishment process, we’ve outlined a detailed step-by-step guide:

1. Review the garnishment order: Upon receiving a garnishment order, carefully review it for accuracy and completeness. Ensure that the employee’s name, Social Security number, and other identifying information are correct. Verify that the order is from a legitimate source, such as a court or government agency.

If you have any questions at all, there will be contact information on the notice. Make sure you move swiftly, as you may be given limited time to start the garnishment or respond to let the notice provider know whether the employee no longer works for you.

1. Notify the employee: Inform the affected employee about the garnishment order in writing, providing them with a copy of the order and any accompanying documents. Be prepared to answer questions and address concerns the employee may have.

If the employee has questions or thinks the order is incorrect, they need to contact the right court or agency. You cannot ignore the garnishment order simply by request of the employee.

1. Determine the employee’s disposable earnings: Calculate the employee’s disposable earnings, which is their gross pay minus any legally required deductions (e.g., taxes, Social Security contributions, etc.). This figure will be used to determine the maximum garnishment amount according to federal and state regulations.
2. Calculate the garnishment amount: Apply the relevant federal and state limits to the employee’s disposable earnings to determine the correct garnishment amount. Be sure to account for any specific rules or exemptions that may apply to the type of garnishment (e.g., child support, tax levies, etc.).

The notice should provide you with information on how to calculate the withholding amount or provide you with a specific dollar figure, based on your company’s payroll frequency.

1. Apply the garnishment to the employee’s pay: Deduct the calculated garnishment amount from the employee’s wages before issuing their paycheck. Ensure that all other payroll deductions (e.g., taxes, retirement contributions, etc.) are applied correctly and in accordance with the law.

Before the first payroll run with the garnishment deductions, we recommend reminding the employee their next paycheck will be less.

1. Remit the withheld funds: Send the withheld garnishment amount to the appropriate agency or creditor as specified in the garnishment order. Be sure to follow any specific remittance instructions and deadlines provided in the order. If you’re allowed to withhold an administrative fee for your company, usually just a few dollars, this is when you would do so.
2. Update payroll records and maintain documentation: Update your payroll records to reflect the garnishment and keep detailed documentation of all actions taken. This includes copies of garnishment orders, correspondence with employees, calculations, and remittance records. Proper record-keeping is essential for demonstrating compliance with payroll garnishment rules and resolving any potential disputes.
3. Monitor for changes or updates: Stay vigilant for any changes to the garnishment order, such as modifications, terminations, or new orders. Adjust your payroll processing accordingly and inform the affected employee of any changes.

Handling payroll garnishments can be a sensitive matter, as it involves discussing an employee’s personal financial situation. As an employer, it’s essential to approach these conversations with empathy, professionalism, and discretion.

Here are some best practices for communicating with employees about payroll garnishments.

1. Initiating the conversation: Before providing written notice of the garnishment, it’s recommended to have an initial discussion with the employee in a private setting. This allows you to explain the situation, answer any questions, and address concerns before formalizing the process.

In today’s remote workplace environment, if you and the employee are not in the same location, you can have this conversation over video chat. However, ensure that it’s done in a timely manner, as you’re limited in the time you have before you must begin deductions.

1. Providing written notice: After discussing the garnishment with the employee, follow up with a written notice that includes a copy of the garnishment order and any accompanying documents. The written notice should clearly explain the garnishment process, your obligations as an employer, and the impact on the employee’s pay. Maintaining a record of this written communication is essential for demonstrating compliance with garnishment regulations.
2. Addressing employee concerns or questions: Encourage the employee to ask questions and voice any concerns they may have. Be prepared to provide accurate information about the garnishment process and direct the employee to relevant resources or agencies for additional support. Remain empathetic and understanding in your responses, acknowledging the potential stress and anxiety the garnishment may cause the employee.
3. Handling requests to ignore the garnishment: If an employee asks you to disregard the garnishment order, it’s crucial to explain that you’re legally obligated to comply and that failure to do so could result in penalties for both the employee and the business. Encourage the employee to seek legal advice or contact the issuing agency or court if they believe the garnishment is incorrect or unjustified.
4. Protecting employee privacy: To maintain trust and protect the employee’s privacy, keep all discussions and written communications about the garnishment confidential. Only share information about the garnishment with those who have a legitimate need to know, such as payroll staff or supervisors directly involved in the process. Avoid discussing the garnishment in public areas or with other employees.

To stop garnishment withholding once the debt has been fulfilled, you’ll need to follow these steps:

1. Receive an order or notice: Wait for an official order or notice from the issuing court or agency indicating that the debt has been satisfied or the garnishment has been terminated. You cannot terminate garnishment withholdings based on information from your employee alone.
2. Review the order or notice: Carefully review the order or notice to ensure it’s legitimate and contains accurate information about the employee and the garnishment. Also, ensure that the total amount received by the agency matches the total amount deducted as indicated in your payroll records.
3. Update your payroll process: Once you’ve confirmed the validity of the order or notice, update your payroll process to cease withholding the garnishment amount from the employee’s wages. If you fail to timely end the garnishment and additional amounts are withheld, your business could be liable to your employee for repayment, plus penalties.
4. Notify the employee: Inform the affected employee in writing that the garnishment has been fulfilled or terminated and that their wages will no longer be withheld.
5. Update your records: Document the receipt of the order or notice, any communications with the employee, and the changes made to your payroll process as a result of the garnishment termination.

Legal Regulations on Payroll Garnishments

As a small business owner, it’s essential to be aware of the federal and state regulations governing payroll garnishments. These regulations dictate how you must handle garnishments, ensuring that both your employees’ rights and your business’s legal obligations are met. Failure to comply with these regulations can result in fines, penalties, and even liability for the full amount of the garnishment if errors are made.

Federal Regulations

At the federal level, the primary regulation governing wage garnishments is the Consumer Credit Protection Act (CCPA). The CCPA establishes limits on the amount that can be garnished from an employee’s wages, based on their disposable earnings (i.e., the amount remaining after legally required deductions such as taxes). Under the CCPA, the maximum garnishment amount for most debts is either 25% of an employee’s disposable earnings or the amount by which their disposable earnings exceed 30 times the federal minimum wage, whichever is lower.

However, some garnishments, such as child support and tax levies, have different limits under federal law. For instance, child support garnishments can be as high as 50%–65% of an employee’s disposable earnings, depending on factors like whether the employee supports other dependents and the age of the outstanding debt.

State Regulations

Besides federal regulations, each state has its own laws governing payroll garnishments. These state-specific regulations can vary widely, with some states imposing stricter limits on the amount that can be garnished, while others may have additional procedural requirements for employers.

As a small business owner, it’s crucial to familiarize yourself with the garnishment laws in your state as well as any other states in which you have remote or in-office employees. Note that some states provide additional protections for employees.

Here is a state-by-state breakdown: